The Land of Income Mobility

There’s an old saying that the rich get richer. This is especially true in America, where the data shows that just about anyone who is dissatisfied with his income has the opportunity to roll up his sleeves and move into a different income bracket.

According to the Census Bureau, the incomes of the rich do indeed grow faster than those in the lower income brackets. Between 1996 and 2006, the incomes of the wealthiest 5% of households rose 14%, while the incomes of the bottom 20% of households grew by only 6%.¹

But despite the debate over so-called “income inequality,” there’s more to this picture — and it is quite encouraging.

Choice Is King

The U.S. Treasury studied income tax returns from 1996 to 2005 and found that well over half of households who were in the lowest income quintile (the lowest 20%) at the beginning of the study had moved to a higher income quintile by 2005. Nearly half of the households in the second-lowest quintile had also moved to a higher quintile during this 10-year period.²

Income mobility is a two-way street: More than half of the households that were in the richest 1% in 1996 were no longer in this category at the end of the study. Nearly half of the richest 5% had moved to a lower income bracket, although the vast majority remained in the highest quintile.³

These findings make it clear that any references to groups of people such as “rich” or “poor” are difficult to quantify because the people and households in these groups change over time.

The message here is that your personal financial situation is largely within your control. Personal choice remains the single most important determinant of financial success.

1–3) Federal Reserve Bank of St. Louis, 2008